On April 27, 2011, Beck Chevrolet Co., Inc., (“Beck”), a franchised motor vehicle dealer, brought suit in New York state court against General Motors (“GM”), a motor vehicle manufacturer, alleging violations of the New York Franchised Motor Vehicle Dealer Act. Beck Chevrolet Co., Inc., No. 11 CIV. 2856 (AKH), 2011 WL 13156875, at *2 (S.D.N.Y. June 15, 2011).
The case was removed to the United States District Court for the Southern District of New York based on the parties’ diversity of citizenship. Id. The United States District Court for the Southern District of New York granted GM’s motion for summary judgment on the claims asserted against it, but declined to award attorney fees to either party. Beck Chevrolet Co. v. Gen. Motors LLC, 787 F.3d 663 (2d Cir. 2016). Both parties then appealed to the United States Court of Appeals for the Second Circuit. Id.
The primary issue on appeal related to GM’s use of a Retail Sales Index (“RSI”) to evaluate its dealers’ sales performance. Id. at 667. To arrive at the RSI value, GM would assign each dealer an “Area of Primary Responsibility,” and, in some cases, an “Area of Geographic Sales and Service Advantage (“AGSSA”).” Id.
To determine an RSI for a Chevrolet dealer, GM would divide the dealer’s actual retail sales by its expected sales, calculated as:
Dealer’s Total Sales
___________________ X 100 = RSI
Expected Sales Based on
Id. Dealers were required to attain an RSI of at least 100, which was GM’s alleged “average” score. Id. at 668. “Total sales” measured all of a particular dealer’s actual sales in a certain period of time. Id. “Expected sales” was based on an adjusted statewide average market share for Chevrolet products by (1) taking into account all new motor vehicle registrations in the United States by segment (e.g., sport utility vehicles or mid-size sedans), and (2) taking into account the relative popularity of a particular segment. Id.
Beck’s primary argument on appeal was that GM’s performance standard was “unreasonable, arbitrary or unfair” under the New York Franchised Motor Vehicle Dealer Act section 463(2)(gg). Id. at 672. Because no case had interpreted this section, the United States Court of Appeals for the Second Circuit asked the New York state Court of Appeals to answer the following question under New York law: “Is a performance standard that requires ‘average’ performance based on statewide sales date in order for an automobile dealer to retain its dealership ‘unreasonable, arbitrary, or unfair’ under New York Vehicle & Traffic Law section 463(2)(gg) because it does not account for local variations beyond adjusting for the local popularity of general vehicle types?” Id.
On May 3, 2016, the New York Court of Appeals answered responded to this question with a “yes.” Beck Chevrolet Co. v. Gen. Motors LLC, 53 N.E.3d 706 (N.Y. 2016), reargument denied, 59 N.E.2d 1208 (N.Y. 2016).
First, the New York Court of Appeals reformulated the question to: “Is a performance standard that used ‘average’ performance based on statewide sales data in order to determine an automobile dealer’s compliance with a franchise agreement ‘unreasonable, arbitrary or unfair’ under N.Y. Vehicle and Traffic Law section 463(2)(gg) because it does not account for local variations beyond adjusting for the local popularity of general vehicle types?” Id. at 712.
To answer, the New York Court of Appeals looked at the language of the statute itself. Id. at 713. Although the statute does not define what constitutes “unreasonable, arbitrary or unfair” performance standards, the New York Court of Appeals determined that, at a minimum, the New York Franchised Motor vehicle Dealer Act section 463(2)(gg) forbids the use of standards not based in fact or responsive to market forces because performance benchmarks that reflect a market different from the dealer’s sales area cannot be reasonable or fair. Id.
Second, the New York Court of Appeals noted that the standard employed by GM reflects its acceptance that market forces matter in assessing dealer sales performance. Id. The RSI is based on an equation (noted above) in which the market sets the foundation for measuring a dealer’s achievement. Id. Additionally, GM measured a dealer’s sales performance by “comparison to a statewide class of dealers, but adjust[ed] the standard to certain local market peculiarities with respect to one metric: local consumer purchasing preferences for certain vehicle types.” Id. Despite this, GM specifically chose to exclude from its measure the impact of customer brand preference on dealer sales. Id. at 714.
The New York Court of Appeals explained that customer purchases are not solely influenced by preferences for a type of vehicle (which GM accounts for through its formula). Rather, customers are also influenced by brand popularity and import bias. Id. Further, the New York Court of Appeals noted that dealers, like Beck, are at an inherent disadvantage when assigned to service an area where Chevrolet is less popular, and then compared to those dealers assigned to service an area where Chevrolet is more popular. Id.
Based on these considerations, the New York Court of Appeals determined:
Therefore, once GM determined that statewide raw data must be adjusted to account for customer preference as a measure of dealer sales performance, GM’s exclusion of local brand popularity or import bias rendered the standard unreasonable and unfair because these preference factors constitute market challenges that impact a dealer’s sales performance differently across the state. It is unlawful under section 463(2)(gg) to measure a dealer’s sales performance by a standard that fails to consider the desirability of the Chevrolet brand itself as a measure of a dealer’s effort and sales ability.
Id. (emphasis added). In addition, the New York Court of Appeals stated that, in order to comply with the New York Franchised Motor Vehicle Dealer Act, “if a franchisor intends to measure a dealer’s performance based on a comparison to statewide data for other dealers, then the comparison data must take into account the market-based challenges that affect dealer success.” Id. (emphasis added).
Because the RSI excluded such an important measure of comparability, the New York Court of Appeals rendered GM’s use of its RSI calculation to determine whether its dealers’ new vehicle sales performance was acceptable to be unreasonable and unfair under the New York Franchised Motor Vehicle Dealer Act. Id.
After the New York Court of Appeals rendered this decision, the United States Court of Appeals for the Second Circuit reversed the federal district court’s earlier ruling on this issue in favor of GM and remanded with a direction to enter judgment for Beck. Beck Chevrolet Co. v. Gen. Motors LLC, 845 F.3d 68, 71 (2d Cir. 2016).
Takeaway: If you are a franchised motor vehicle dealer subject to the protection of the New York Franchised Motor Vehicle Dealer Act, check to make sure your motor vehicle manufacturer does not impose upon you the same (or similar) type of “unreasonable and unfair” performance standard as Beck.
*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.